Purpose of Call Money Market

Characteristics

• Maturity: The maturity of the call money market instruments are varying between a day to a fortnight. As it consists with the day-to-day surplus funds, so its payable on demand at the option of either the lender or the borrower.

• Liquidity Nature: All the instruments of this market are highly liquid and their liquidity being exceeded only by cash.

• Yield: It includes the rate of interest paid on call loans and its also known as Call Rates. The call rate is highly variable from day to day and often from hour to hour. It may vary from centre to centre also. It is very sensitive to the changes in demand for and supply of call moneys.

• Location of Transaction: The call money market is mainly located in big industrial and commercial centers.

• Volume of Call Money to be Transacted: The volume of call loans depends on the extent of deposits accrual, the possibility of quick investment in and liquidation of other money market instruments, timing of advance tax payments and seasonal fluctuations in demand for credit etc.

• Risk: This includes the flexibility of call money rate. As it is volatile in accordance with the difference in Trading Centers & Bank Rate so any removal of ceiling in these centers, the call money rate is supposed to be fluctuated widely. Beside these, the large amount of borrowings by banks an certain dates to meet CRR requirements, overextended credit position of some banks, sudden withdrawal of funds by financial institutions and business companies, illiquidity in money market and forex market instability are the major factors behind this riskiness. • Participants: Simply, all the scheduled & non-scheduled commercial banks, brokers, dealers and other financial institutions with good financial reputations that may fall short of call money are the issuers of the call money.

All the commercial banks, brokers, dealers, financial Institutions and the corporations who may have surplus funds investable for a short time are the Investors of the call money.

Other participants include Securities and Exchange Commission (SEC), different financial institutions and individuals of financial status.

Economic Functions

The call money market plays a great role in the economy. From it the Issuers can have access to meet their immediate demands by accepting the call money for a short moment at a cost (call rate) by name. On the other hand, the Investors can invest their current idle surpluses at the option at payable on demand with some return. Thus all the participants have some speculative benefits and the economic activities become accelerated.

REPURCHASE AGREEMENT

A popular alternative to the demand loan is the Repurchase Agreement (RP). Repurchase agreement is the sale of security with a commitment by the seller to buy the security back from the purchaser at a specified price at a designated future date. Basically, a repurchase agreement is a collateralized loan, where the collateral is a security. The collateral in a repo can be money market instruments, Treasury securities, federal agency securities, mortgage-backed securities or asset-backed securities.

Objective of the Issuance

The dealers use the repo market for borrowing on a short term basis because the repo rate is less than the cost of bank financing. From the customers’ perspective, the repo market offers an alternative yield on short term secured transaction that is highly liquid.

Larger banks provide RPs to dealers and larger banks, in turn, borrow from dealers and other non-bank institutions and prohibitions against paying interest on demand deposit accounts. Central bank of a country e.g. Bangladesh Bank introduce the RPs to control the liquidity position of the market upto a certain limit.

Types 1) Due Bill/ Hold in-custody Repo: In a Due Bill repo, the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account ("held in custody") by the borrower, for the lender, throughout the duration of the trade. Due to the high risk to the security lender, these are generally only transacted with large, financially stable institutions.

2) Tri-party Repo: The distinguishing feature of a Tri-Party Repo is that a custodian bank or international clearing organization acts as an intermediary between the two parties to the Repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market and substitution of collateral. In addition, because the collateral is being held by an agent counterparty risk is reduced.

3) Whole Loan Repo: A Whole Loan Repo is a form of Repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security.

4) Equity repo: The underlying securities for most Repo transactions are government or corporate bonds. Equity Repos are simply repos on Equity securities such as common (or ordinary) shares.

5) Sell/ Buy backs and Buy/ Sell backs: A Sell/Buy Back is the spot sale and a forward repurchase of a Security.

Characteristics

Like other financial instruments, the repurchase agreements also have some mentionable characteristics. The typical natures of the RPs are described briefly in the following way. • Maturity: Some RPs are for a set length of time. When the term of the loan is 1 day, it is called an “overnight repo” and if the loan is for more than a day is called “term repo”. While others known as “continuing contracts”, carry no explicit maturity date but may be terminated by either party on short notice.

• Liquidity Nature: The RPs are highly liquid as these generally for a very short period (1 to 9 days) and the collateral used in this case is marketable. On the other hand, the “continuing contracts” may be terminated by either party on short notice. One thing must be noted here that the secondary market for repo is absent.

• Yield: The interest rate on RPs is the return that a dealer must pay a lender for the temporary use of money and is closely related to other money market interest rates. The current RP rate is usually close to the ‘bank rate’ as well as the Treasury bill rate. The repo rate is usually the difference between the underlying securities current price and the agreed upon future repurchase price. Interest income from repurchase agreements is determined by the following formula:

RP’s interest income [pic] [pic] [pic] [pic] For example, an overnight loan of TK. 100 million to a dealer at a 7 percent RP rate would yield interest income of TK. 19,444.44. That is, RP interest income [pic] TK. 100,000,000 [pic] .07 [pic] 1/360. Note that under a ‘continuing contract RP’, the interest rate changes daily, so the calculation above would be made for each day the funds were loaned, and the total interest owed would be paid to the lender when the contract is ended by either party. Repo rate vary from transaction to transaction depending on the following factors: • Quality: The higher the quality and liquidity of the collateral, the lower is the repo rate.

• Term of the repo: The effect of the term of the repo on the rate depends on the shape of the yield curve.

• Delivery requirements: If the delivery of the collateral to the lender is required, the repo rate will be lower. If the collateral can be deposited with the bank of the borrower, a higher repo rate is paid.

• Availability of Collateral: The more difficult it is to obtain the collateral, the lower the repo rate.

N.B. Although these factors determine the repo rate on a particular transaction, the bank rate determines the general level of repo rates.

• Risk: Despite the high-quality collateral typically underlying a repo transaction, both parties to the transaction are exposed to credit risk. If the dealer can’t repurchase the securities, the customer may keep the collateral; if the interest rates on govt. securities subsequent to the repo transaction, the market value of the govt. securities declines and the customer own the securities with a market value less than the amount it loaned to the dealer. The lender also faces the risk when the borrower uses the collateral fraudulently by offering it as collateral for another repo transaction.

• Participants: Financial and non-financial firms participate in the market as both sellers and buyers depending on the circumstances they face. Thrifts and commercial banks are typically net sellers of collateral. Money market funds, bank trust departments, municipalities and corporations are typically net buyers of collateral.

The key investors in the repo markets are dealers, larger banks, state and local government, insurance company and foreign financial institutions. Another participant is the repo broker.

Central Bank is also involved in the repo market. The central banks influence short term interest rates through its open market operation, that is, by the outright purchase or sale of govt. securities.

Economic Functions

Central Banks use the RPs to control the liquidity position and the money supply in the market. If the central bank wants to enhance the money supply, it can introduce some repos in the market. Thus the repo may be used as a useful tool in the economical ‘contraction’.

The dealers use the repo market for borrowing on a short term basis because the repo rate is less than the cost of bank financing.

CERTIFICATES OF DEPOSIT

A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date (from three months to five years), a specified interest rate, and can be issued in any denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on demand like those in a checking account.

One of the largest of all money market instruments, measured by dollar volume, is the negotiable certificate of deposit (CD). The negotiable CD is one of the youngest of all U.S money market instruments. It dates from 1961, when CitiBank began offering to its corporate customers. A CD is an interest bearing receipt for funds left with a depository institution for a set period of time. True money market CDs are negotiable instruments that may be sold any number of times before reaching maturity.

Despite the benefits, there are two main disadvantages to CDs. First of all, the returns are paltry compared to many other investments. Furthermore, your money is tied up for the length of the CD and you won't be able to get it out without paying a harsh penalty.

Types

Negotiable CDs may be registered on the books of the issuing depository institution or issued in bearer form to the purchasing investor. CDs issued in bearer form are more convenient for resale in the secondary market because they are in the hands of the investors who own them. New Types of CDs are: i. Variable rate CDs. ii. Rollover or roly-poly CDs. iii. Jumbo CDs. iv. Yankee CDs. v. Brokered CDs. vi. Bear and bull CDs. vii. Installment CDs. viii. Foreign-index CDs.

Characteristics

• Maturity: Maturities of Certificate of deposits range upward to around 18 months, depending on the customers’ need. However most negotiable CDs have maturities of 6 months or less. CDs with maturities beyond one year are called term CDs. • Liquidity Nature: Certificates of Deposit are highly liquid. They can be easily sold in the secondary market. • Yield: The yields on CDs are normally slightly above the Treasury bill rate due to greater default risk, a thinner resale market and a state & local govt. tax exemption from earnings from TBs. interest rate on CDs are computed as a yield to maturity but are quoted on a 360 day basis (except secondary market). The general formula to calculate the yield is: DRCD [pic][pic][pic][pic]

• Risk: CDs have greater default risk than the Treasury bill. Investors have grouped the issuing banks into different risk categories and yields are set accordingly. CDs from the largest and most financially sound banks are rated prime; smaller banks and those viewed as less stable issue and have more risk are known as non-prime.

• Participants: The principal buyers of negotiable CDs include corporations, state & local govt., foreign central banks, wealthy individuals, insurance companies, pension funds, investment companies, savings banks, credit unions and money market funds.
COMMERCIAL PAPER
Money Market: Commercial Paper

Commercial paper is one of the oldest of all money market instruments. It is a short-term, unsecured promissory notes issued by well known companies that are financially strong and have high credit ratings. The funds raised from a paper issue normally are used for current transactions – to purchase inventories, pay taxes, meeting payrolls and cover the short-term transactions rather than for capital transactions (long-term investments).

For many corporations, borrowing short-term money from banks is often a laborious and annoying task. The desire to avoid banks as much as possible has led to the widespread popularity of commercial paper. (See Why do companies issue bonds instead of borrowing from the bank?)

Commercial paper is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average.
For the most part, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Furthermore, typically only companies with high credit ratings and credit worthiness issue commercial paper. Over the past 40 years, there have only been a handful of cases where corporations have defaulted on their commercial paper repayment.

Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smaller investors can only invest in commercial paper indirectly through money market funds.

Types

There are two major types of commercial paper – direct paper and dealer paper. The main issuers of direct paper are large finance companies and bank holding companies that deal directly with the investor rather than using a securities dealer as an intermediary. The other major variety of commercial paper is dealer paper, issued by security dealers on behalf of their corporate customers. Also known as industrial paper, dealer paper is issued mainly by non-financial companies, smaller banks holding companies and finance companies.

Characteristics

• Maturity: Maturities of U.S commercial paper range from 3 days to 9 months with an average maturity ranging from 20 to 45 days. The most common maturities for the commercial paper are 7, 15, 30, 60 and 90 days and about 99 percent is issued in electronic not paper form.

• Liquidity Nature: It is traded mainly in the primary market. Opportunities for resale in the secondary market are more limited, although some dealers today assists their customers buy redeeming a portion of the notes they sale. Because of the limited resale possibilities, inventors are usually careful to purchase those papers issues whose maturity matches their planned holding periods, though resale opportunities (liquidity) have increased in recent years. • Yield: Most is issued at a discount from par; the investors’ yield arises from the price appreciation of the security between its purchase date and maturity date. The discount rate of return on commercial paper is: DRCP [pic][pic][pic][pic] Note that the interest rates attached to direct paper to be lower than the interest rates on dealer paper, because the latter is generally issued by smaller firms with somewhat greater risk exposure.

• Risk: From the investors view point, the commercial paper is somewhat risky as this paper is unsecured. Issuing company may have all risk of sale, with the dealer agreeing only to self the issue at the best price available less commission.

• Participants: In effect this is a market in which a corporation borrows from other corporations. The most important investors in the commercial paper market include non-financial institutions, money market mutual funds, bank trust departments, small banks, pension funds, insurance companies and state & local governments.

The market is concentrated among a handful of dealers that account for the bulk of all trading activity. Dealers maintain inventories of unsold issues and repurchased paper, but they usually expect to turn over most of a new issue within 24 hours.

Eurodollar Deposit
Contrary to the name, Eurodollars have very little to do with the euro or European countries. Eurodollars are U.S. dollar-denominated deposits at banks outside of the United States. This market evolved in Europe (specifically London), hence the name, but Eurodollars can be held anywhere outside the United States.

The US dollar deposits in non-US banks called Eurodollar certificates of deposit or Eurodollar CDs. Furthermore, because interest rate ceiling were historically imposed on dollar deposits in US banks, corporations with large dollar balances often deposited their funds overseas to receive a higher yield.

The Eurodollar market is relatively free of regulation; therefore, banks can operate on narrower margins than their counterparts in the United States. As a result, the Eurodollar market has expanded largely as a way of circumventing regulatory costs.

The average Eurodollar deposit is very large (in the millions) and has a maturity of less than six months. A variation on the Eurodollar time deposit is the Eurodollar certificate of deposit. A Eurodollar CD is basically the same as a domestic CD, except that it's the liability of a non-U.S. bank. Because Eurodollar CDs are typically less liquid, they tend to offer higher yields.

The Eurodollar market is obviously out of reach for all but the largest institutions. The only way for individuals to invest in this market is indirectly through a money market fund.

Characteristics

• Amount of Transaction: Eurodollar CD volume has grown substantially over time, as a significant portion of international trade and investment transactions involves the US dollar as a medium of exchange. Some firms overseas receive US dollar as payment for exports and invest in Eurodollar CDs. Because these firms may expect to need dollars to pay for future imports they retain dollar denominated deposits rather than convert dollars to their home currency.

• Maturities: The common maturities Eurodollar CDs is one day to one year.

• Yield: It rates are higher than the yields on other money market securities with the same maturity because of their lower degree of liquidity and higher degree of default risk during the period.

• Marketability: A secondary market for Eurodollar CDs exists, allowing the initial investors to liquidate their investment if necessary. The growth in Eurodollar volume has made the secondary market more active.

• Participants: The most common participants in this market are firms and governments.

PART THREE i. Overview on Money Market of Bangladesh ii. Call Money Market iii. Repurchase Agreement iv. Reverse Repo v. Treasury Bill

Overview on Money Market of Bangladesh

A sound and well-functioning financial system helps mobilize savings, allocate resources, exert corporate control, facilitate risk management and ease trades and contracts by solving market frictions. Efforts have been continued in FY05 and FY06 to establish a sound financial system in the country. Despite the stronger growth of some major macroeconomic indicators, Bangladesh economy faced some challenges originating from price hike of oil and petroleum products and some major imported commodities in the international market causing fluctuations in real sector and foreign exchange market in FY06. As a result, the financial market was a little bit volatile. Except these temporary fluctuations in the financial market, the overall market was sound functioning during FY06. With a view to establishing a healthy, sound, well functioning and dynamically evolving financial system, a series of reform measures were initiated in FY06.

Whenever a bear market comes along, investors realize (yet again!) that the stock market is a risky place for their savings. It's a fact we tend to forget while enjoying the returns of a bull market! Unfortunately, this is part of the risk-return tradeoff. To get higher returns, you have to take on a higher level of risk. For many investors, a volatile market is too much to stomach - the money market offers an alternative to these higher-risk investments.

The money market is better known as a place for large institutions and government to manage their short-term cash needs. However, individual investors have access to the market through a variety of different securities. In this tutorial, we'll cover various types of money market securities and how they can work in your portfolio.

Call Money Market

In spite of a decreasing trend in the volume of transactions of the amount borrowed in the last quarter as well as lent in the third and fourth quarters, the total volume of transactions in the overnight inter-bank call money market was significantly higher in FY05 against the increase of the previous year reflecting brisk activities in the money market. The call money rate witnessed some degree of fluctuations in the last two quarters of FY05 resulting from the pressure in the foreign exchange market and tight liquidity situation in the money market. As a result, the weighted average interest rates in the call money market remained at the range of 6.5 - 17.0 percent during the second half of FY05 resulting in overall borrowing and lending rates of 9.2 percent and 8.3 percent respectively in FY05 as compared with 4.7 percent and 5.5 percent respectively in FY04.

The volume of transactions and weighted average interest rates in the call money market showed mixed trend during FY06 reflecting some noise in the activities of money market. The call money rates witnessed some degree of fluctuations in the last two quarters of FY06 resulting from the recent pressure in the foreign exchange market and tight liquidity situation in the money market. This stemmed mainly due to the increased demand of Government’s credit that was met up from NCBs to finance the cost of imported petroleum products. Till the second quarter of FY06 the call money rates remained mostly stable but became somewhat volatile in the third quarter. At the beginning of the last quarter of FY06, the weighted average call money rate stood at 21.5 percent, substantially higher than 5.4 percent recorded in the beginning of the first quarter.

In Bangladesh the most of the call money markets are situated in Dhaka, Chittagong, Khulna and Rajshahi etc.

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Repurchase Agreement
With a view to inject the required money in the economy the daily repo auctions were continued in FY05 and FY06 to facilitate liquidity management within a short period of time by enabling the banks to place bids for funds collateralized by T-bills. Bangladesh Bank provided the banks with the needed funds against the repo facility thus maintaining the market liquidity at desired level. As the excess liquidity declined substantially, the interest rates in the inter-bank call money as well as repo market went up sharply particularly in the second half of FY05. A total of 138 repo auctions were held during FY05. In all, 1212 bids for Taka 630.8 billion were received, of which 818 bids for a total of Taka 233.1 billion were accepted. The weighted average interest rates against the accepted bids ranged from 10.0 to 4.5 percent per annum in FY05 as against 5.5 to 4.4 percent per annum in the previous year.

This facilitated liquidity management within a short period by enabling the banks to place bids for funds collateralized by T-bills. Bangladesh Bank provided the banks with the needed funds against the repo facility thus maintaining the market liquidity at desired level. A total of 77 repo auctions were held during FY06. In all, 148 bids for Taka 341.9 billion were received in these auctions, of which 25 bids for a total of Taka 53.4 billion were accepted. The weighted average interest rates against the accepted bids ranged from 8.5 to 8.0 percent per annum in FY06 as against 10.0 to 4.5 percent per annum in FY05. The comparison between the two fiscal year’s repo rate can be easily recognized from the following chart.
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Reverse REPO
As a counterpart of repo auctions, the reverse repo auctions also continued in FY05 and FY06. The reverse repo auctions were used as a fine-tuning supplement to the weekly T-bills auctions to mop up excess liquidity.

Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk.

Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough.

There are also variations on standard repos:

• Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher price • Term Repo - exactly the same as a repo except the term of the loan is greater than 30 days.

A total of 121 daily reverse repo auctions were held in FY05. In all, 408 bids of 1-2 day and 3-9 day tenors for a total of Taka 421.5 billion were received, of which 394 bids amounting to Taka 408.6 billion were accepted. The weighted average interest rates against the accepted bids ranged between 2.4 to 5.0 percent per annum.

Bangladesh Bank maintained the intended level of liquidity in FY06. The reverse repo auctions were used as a fine-tuning supplement to the weekly T-bills auctions to contain the credit growth and to keep the monetary aggregates on track during FY06. A total of 224 daily reverse repo auctions were held in FY06. In all, 1304 bids of 1-2 day and 3-9 day tenors for a total of Taka 964.2 billion were received in these auctions, of which 1299 bids amounting to Taka 962.1 billion were accepted. The weighted average interest rates against the accepted bids ranged from 4.5 to 6.5 percent per annum in FY06.

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Govt. Treasury Bill

In Bangladesh, two types of TBs have been in trend so far: Ordinary and Ad-hoc. The former are issued to the public and the Bangladesh Bank for enabling the government to meet the needs of supplementary short - term finance. According to another categorization, TBs are Tap and Auction Bills. Weekly auctions of 28-day, 91-day, 182-day, 364-day and 2-year government Treasury bills continued to be the main instruments for monetary policy management during the year under report. Bangladesh Bank actively used Treasury bill sales to mop up excess liquidity linked to large inflow of export earnings and remittances as well as huge government borrowing. The bidders' preference of T-bills remained unchanged during the year under report because of its suitability as a stable base for banks and financial institutions in meeting their SLR requirements. The market-based yield rates of long term T-bills also made suitable for investment by the Provident Funds. A shift in the bidders’ preference to the shortest (28-day) tenor bill from the 364-day and 2-year tenor bills in FY05 and FY06.

The outstanding Taka 116.9 billion holding of long term (2-Year and 5-Year) T-bills by banks and other investors as of end June 2005 is, of course, not large when seen against Taka 1160.4 billion time deposits in banks and financial institutions. A shift in the bidders’ preference to the shortest (28-day) tenor bill from the 364-day and 2-year tenor bills in FY05. The yields for various tenors as of end June 2005 depicted somewhat narrower range than the yields as of end June 2004.

The outstanding amount of Taka 104.4 billion holding of long term (2-Year and 5-Year) T-bills by banks and other investors as of end June 2006 is, of course not large when seen against Taka 1380.2 billion time deposits in banks and financial institutions. The yields of T-bills of different tenors varied within wide ranges. The yields for various tenors as of end June 2006 depicted narrower range than the yields as of end June 2005. Overall, yields on T-bills of all maturities depicted a gradual increasing trend during the year under report as compared to the previous year owing partly to tight monetary policy stance in FY06. The weighted average annual yield rate of the accepted bids ranged from 6.6 percent to 9.0 percent in FY06, which were 4.0 percent to 7.2 percent in FY05.
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Findings: From the above chart it is quite clear that the average TB rate of FY05 is lower than that of FY04 and the rate is increased fairly in the FY06 due to tight monetary policy adopted by the government. This TB rate was the highest among all the three because the government took tight monetary policy during FY06.

Limitations of TB Market in Bangladesh:
The TB market in Bangladesh is till now apparently narrow and inactive in comparison with the other nations. A part of explanation can be given by comparing the institutional arrangements in Bangladesh with those in England where the market is active. In the UK, banks deal in TBs because they can buy or sell them to discount houses for settling inter-banking indebtedness and for coping with the vagaries of government payments and receipts. The volume of transactions between banks and discount houses has been large because for historical reasons, banks prefer to approach the latter for financial accommodation rather than the Bank of England. While in Bangladesh, the discounting facility is quite new.

Another important factor in this context is the extremely low rate of return on investment in TBs. The difference between the TB rate and deposit rates has been wide enough to discourage investors like companies from investing in treasury bills.
Steps Taken By The Govt.

Giving due importance to the rollover and refinancing risks on marketable securities, a number of risk minimization steps have already been implemented by the government with the help of the central bank and other relevant organizations. Some of the more notable initiatives are listed below: • Formation of Cash and Debt Management Committee (CDMC) for efficient, effective and timely policy decision making regarding debt management and budget financing; • Separation of Government’s Cash Management from Debt Management operations; • Enhancing the Ways and Means Advance Limit from Taka 640 million to Taka 10,000 million and arrangements for temporary overdraft facilities with Bangladesh Bank; • Significant reduction of government’s cash reporting time to 5 days; • Formulation of Short and Medium Term Cash Management Action Plan to address the issue of identifying idle cash balances and their proper utilization; • Gradual computerization of bank branches that performs government treasury functions and 40 branches have already been computerized so far.

Several steps have also been undertaken to fine tune the primary auction process, facilitate market competition and other measures that supports efficient price discovery in the government security market. The following include some of the steps taken to achieve this end: • Government bonds have been listed in the Dhaka Stock Exchange (DSE) as a step towards secondary market development; • Discontinuance of adhoc Treasury Bills and introduction and announcement of Treasury bill and Treasury Bond Auction Calendar to ensure market predictability and increases in participation initiatives for the market players; • Comprehensive guidelines for Treasury Bills and Treasury Bonds limiting Treasury Bills up to 1 (one) year maturity, increasing the frequency of bond action (in every 1 month instead of 2 months), freezing accumulated adhoc treasury bills (accumulated up to 30th June, 2006) and the preparation of an amortization schedule spreading over 15 years;
Wrapping Up…

The money market is extremely broad and deep, meaning it can absorb a large volume transaction with only small effect on security prices and interest rates. Investors can easily sell most money market instruments on short notice, often in a matter of minutes. This is one of the most efficient markets in the world, containing a vast network of security dealers, central banks and funds brokers in constant touch with one another and alert to any bargains.

Currently, four types of treasury bills (T-bills) are being transacted through auctions as monetary tools to adjust the government borrowing from the banking system. The T-bills have 28-day, 91-day, 182-day and 364-day maturity periods. Besides, Bangladesh Bank Bills are used as monetary tools as part of its monetary policy.

The inter-bank call money rate was steady last week repeating the previous week's trend despite withdrawal of large amounts of cash through auctions of reverse repurchase agreement (repo), treasury bills and Bangladesh Bank (BB) bills. The call rate stayed above the bank rate of 5.00 per cent throughout the week indicating a higher-than-expected pressure on liquidity. Some banks and non-banking financial institutions borrowed cash at high rates from the inter-bank market to satisfy immediate demands of their clients. This forced the call rate to rise above the main trend of the market.

The market players are closely observing the new public debt management strategy, so it is difficult to make any comment on the possible impact of the measures on the money market. But we can only infer that the new strategy may help bring dynamism in the secondary bond market. The net outflow of cash from the market is expected to increase pressure on liquidity.

Annexure

i) Volume of Trade and Weighted Average Interest Rates in Call Money Market in FY 2005
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ii) Volume of Trade and Weighted Average Interest Rates in Call Money Market in FY 2006
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[pic] iii) Repo Auctions FY 2005 [pic]

iv) Repo Auctions FY 2006 [pic]

v) Reverse Repo Auctions FY 2005 [pic]

vi) Reverse Repo Auctions FY 2006 [pic]

vii) Govt. Treasury Bill Auctions FY 2005 [pic]

viii) Govt. Treasury Bill Auctions FY 2006

Bibliography

1. Frank J. Fabozzi and Franko Modigliani – Capital Markets-Institutions and Instruments. 2. Peter S. Rose – Money and Capital Markets. 3. I. M. Bhole – Financial Markets and Institutions. 4. Official Website of Bangladesh Bank – www.bangladesh-bank.org 5. www.wikipedia.com 6. www.thefinancialexpress.com [pic]
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Current

RP rate

Amount

of loan

Figure: Call Money Rate during FY06

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Figure: Call Money Rate during FY05

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Figure: Comparison of average ‘repo rate’ in between FY05 and FY06

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Figure: Comparison of average ‘reverse repo rate’ in between FY05 and FY06.

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Figure: Comparison of average ‘TB rates’ among FY04, FY05 & FY06.